Unaudited Semi-Annual Report for the six month period ended January 31, Franklin Floating Rate Fund PLC

Transcription

1 Unaudited Semi-Annual Report for the six month period ended January 31, 2018 Franklin Floating Rate Fund PLC

2 This document does not constitute an offer of shares in Franklin Floating Rate Fund plc (the Company ). Subscriptions are only valid if made on the basis of the current Prospectus, as amended (including the Product Key Facts Statement), supplemented by the most recent audited annual report of the Company and any subsequent semi-annual report. Distribution of this document may be restricted in certain jurisdictions; persons into whose possession this publication comes should inform themselves of and observe such restrictions. This document does not constitute the distribution of any information or the making of any offer or solicitation by anyone in any jurisdiction in which such distribution or offer is not authorized or to any person to whom it is unlawful to distribute such a booklet or make such an offer or solicitation.

3 Contents General Information 2 Investment Manager s Report 3 Portfolio of Investments 5 Statement of Comprehensive Income 7 Statement of Financial Position 8 Statement of Changes in Net Assets Attributable to holders of Redeemable Shares 10 Statement of Cash Flows 11 Notes to the Financial Statements 12 Appendix A: Financial Statements of Franklin Floating Rate Master Trust 29 Unaudited Semi-Annual Report 1

4 General Information Board of Directors Investment Manager Hans Wisser (German) Franklin Advisers, Inc. Francis Ennis* (Irish) One Franklin Parkway Gregory E. McGowan (U.S.) San Mateo David McGeough* (Irish) CA Ken Lewis (U.S.) USA (Alternate to Gregory E. McGowan) * Independent Directors. All Directors are non-executive. Distributor Administrator/Secretary Franklin Templeton International Services S.à r.l. J.P. Morgan Administration Services (Ireland) Limited 8A, rue Albert Borschette JPMorgan House L-1246 International Financial Services Centre Luxembourg Dublin 1 Ireland Legal Advisors Independent Auditors Matheson PricewaterhouseCoopers 70 Sir John Rogerson s Quay Chartered Accountants and Statutory Audit Firm Dublin 2 One Spencer Dock Ireland North Wall Quay Dublin 1 Ireland Depositary Sponsoring Broker J.P. Morgan Bank (Ireland) plc Matheson JPMorgan House 70 Sir John Rogerson s Quay International Financial Services Centre Dublin 2 Dublin 1 Ireland Ireland Alternative Investment Fund Manager Registered office Franklin Templeton International Services S.à r.l. J.P. Morgan Bank (Ireland) plc 8A, rue Albert Borschette JPMorgan House L-1246 International Financial Services Centre Luxembourg Dublin 1 Ireland Registered Number Unaudited Semi-Annual Report

5 Investment Manager s Report for the six month period ended January 31, 2018 Franklin Floating Rate Fund plc (the Company ) This commentary reflects the position of the Franklin Floating Rate Master Trust (the Master Trust ), as this is the sole investment of the Company. Syndicated Bank Loan Market Overview Although technical conditions were more subdued compared to the strong environment earlier in the year, the loan market rallied at the end of the period amid expectations of rising rates and a supportive economy. Nonetheless, principal returns were largely flat on average for the entire period, while income provided a majority of the total returns. Retail investor demand for the asset class remained slow, but issuance from collateralized-loan-obligations (CLOs) helped to provide support to loan prices. Flows remained muted for most of the period despite a December rate hike during the period. Continued tight conditions, further repricing and uncertain rate hikes in 2018 helped to dampen demand for the asset class. However, increasing Treasury yields toward the end of the period helped to renew retail investor interest, which led to modest positive flows into loan mutual funds. CLO issuance was also strong and total volume for 2017 outpaced volume in the past two years. Issuance increased as liability spreads tightened and managers were able to place the highest rated tranches of a new vehicle at increasingly tight levels. In addition to the new vehicles launching, refinancing transactions were especially active in the CLO market as managers looked to tighten liability spreads through refinancing to offset the impacts of repriced loans. However, the lack of collateral in terms of new supply helped to restrain CLO activity, amid relatively low net new issuance. New issuance during the period pushed the full year 2017 total to the highest volume on record. However, consistent with previous periods, issuance was largely limited to refinancing and repricing transactions. Repricing deals, which refinanced loans to tighten spreads, increased significantly and reached the highest volume since earlier in More than half of issuers in the market repriced their term loans at least once during the year. Legislation passed by the U.S. government to make changes to the tax code shifted focus on provisions that could potentially impact leveraged lending. Some investors expected the legislation to potentially increase economic growth and eventually increase interest rates, while also possibly increasing the flexibility for more deals to finance large mergers-and-acquisitions. However, changes in interest expense deductibility rules were expected to potentially negatively impact highly levered issuers, especially loans with relatively lower ratings. Furthermore, federal agencies that launched leveraged lending guidelines in 2013 that set limits on leverage of new transactions signalled that they could revisit the guidelines and potentially revise them. While the final outcome was undecided, investors expected that a removal of the guidelines would loosen regulatory oversight on leveraged lending. However, even if the guidelines go away, expectations for large leveraged buyout deals were muted, as equity valuations and competition from strategic corporate buyers remain high. Default activity pushed the default rate by volume to the highest level in seventeen months during the period. The largest issuers to default included those in the energy, retail, and broadcasting industry. Another large broadcasting issuer undergoing creditor negotiations also faced similar industry headwinds and a high debt burden, which heightened expectations of another large default in future months that would increase the default rate to the highest level in almost three years. Nonetheless, the default rate including that issuer was expected to remain below the historical average for the loan market. Unaudited Semi-Annual Report 3

6 Investment Manager s Report (continued) for the six month period ended January 31, 2018 Investment Strategy We believe the increasingly tight pricing has increased the vulnerability of the market toward external macroeconomic events following multiple waves of repricing transactions in the loan market. In response, as the market gets further along in the credit cycle, we have maintained our overweight in loans rated in the upper tier, which we would expect to outperform during periods of future volatility. Additionally, we have invested in a handful of issuers with relatively shorter maturities that we believe would be closer to a near-term catalyst such as repayment or refinancing. Although the Master Trust s intentional investment in these select loans contributed to recent volatility as the issuers looked to address their upcoming maturities, we believe these investments are over a longer time horizon. We have actively engaged management teams, sponsors, and other lenders of these issuers in order to generate favourable transactions and achieve improved performance for the entire portfolio. Manager s Discussion During the period under review, the Master Trust returned 1.36%, underperforming its benchmark, the CS Leveraged Loan Index (CSLLI), which returned 2.54%. The Master Trust s overweight in the upper tier detracted from relative performance, as upper tier loans returned 2.15%, middle tier returned 2.53%, and lower tier returned 4.57%, according to the index. Our large position in an issuer in the energy industry contributed to performance as the company looked to address its upcoming maturity. However, the Master Trust s overweight in the retail sector and a position in the consumer durables space detracted as that issuer also sought to address its short-duration term loan. The top contributors and detractors during the period both included issuers in the retail sector, as well as loans with relatively shorter maturities. The term loan of a specialty retailer with multiple core brands traded higher after the company reported results in-line with expectations, which improved demand in the market following price declines from previous quarters. Meanwhile, a provider of oil and gas contributed to performance as investors expected a more favourable outcome for the term loan as the company negotiated a deal to address its 2018 term loan maturity. However, a manufacturer of firearms and ammunition with a term loan due in 2019, detracted from performance as firearm sales declined. Finally, term loan in the retail space (a leading retailer in the specialty pet market) declined as the company acquired an online competitor, which increased leverage and increased uncertainty surrounding the companies integration. While the Master Trust maintained a significant overweight in higher-rated loans, its weighting in the upper tier declined during the period, due to credit rating downgrades and sells of higher rated loans. Upper tier loans were approximately 62% of the portfolio at the beginning of the period (compared to 32% for the index), but declined to 53% at the end of the period (compared to 32% for the index). The Master Trust experienced relatively higher outflows during the quarter and focused on sells of loans with relatively tighter spreads, which were primarily in the upper tier. We also maintained the Master Trust s investment in AAA to A rated CLO tranches as well as two open end funds, Franklin Middle Tier Floating Rate Fund and Franklin Lower Tier Floating Rate Fund. The investments allowed the Master Trust to have further exposure to credit, while providing additional liquidity. The Master Trust also held protection in HYCDX, an index of high yield bond credit default swaps providing synthetic exposure to the high yield bond market, to protect against volatility in the credit markets. Franklin Advisers, Inc. Investment Manager February Unaudited Semi-Annual Report

7 Portfolio of Investments as at January 31, 2018 Security name Unit Trust Holdings Franklin Floating Holding August 1, 2017 Purchases Sales Holding January 31, 2018 Fair Value USD 000 % Net Asset Value Rate Master Trust 240,440,405 12,666,917 (54,684,097) 198,423,225 1,718, % Total Unit Trust Holdings 1,718, % Maturity Date Currency Forward Foreign Currency Contracts* Amount Bought Currency Amount Sold Counterparty Unrealised Gain USD 000 % Net Asset Value February 20, 2018 EUR 11,094,905 USD (13,598,005) J.P. Morgan % February 20, 2018 EUR 10,319,637 USD (12,655,576) Morgan Stanley % February 20, 2018 EUR 6,095,374 USD (7,480,303) Citibank % February 20, 2018 SGD 4,105,715 USD (3,107,932) Morgan Stanley % February 20, 2018 SGD 4,092,871 USD (3,098,336) J.P. Morgan % February 20, 2018 EUR 4,075,283 USD (4,997,703) Bank of America % February 20, 2018 EUR 3,637,069 USD (4,461,884) UBS % February 20, 2018 SGD 685,105 USD (518,933) Citibank % February 20, 2018 SGD 671,064 USD (508,134) Bank of America % February 20, 2018 EUR 631,635 USD (774,675) HSBC % February 20, 2018 SGD 599,239 USD (453,779) Goldman Sachs % February 20, 2018 SGD 598,525 USD (453,256) UBS % February 20, 2018 SGD 116,539 USD (88,232) HSBC % February 20, 2018 SGD** 11,017 USD (8,340) BNP Paribas 0.00% February 22, 2018 CNH 2,991,203 USD (465,324) J.P. Morgan % February 22, 2018 CNH** 130,581 USD (20,314) Citibank 0.00% February 22, 2018 CNH** 123,352 USD (19,186) Morgan Stanley 0.00% February 22, 2018 CNH** 67,463 USD (10,494) Bank of America 0.00% February 22, 2018 CNH** 66,469 USD (10,336) UBS 0.00% % Maturity Date Currency Forward Foreign Currency Contracts* Amount Bought Currency Amount Sold Counterparty Unrealised Loss USD 000 % Net Asset Value February 20, 2018 USD 3,292,171 EUR (2,651,430) J.P. Morgan (3) 0.00% February 20, 2018 USD 2,583,668 EUR (2,097,942) Morgan Stanley (23) 0.00% February 20, 2018 USD 1,722,821 EUR (1,403,094) J.P. Morgan (21) 0.00% February 20, 2018 USD** 175,891 SGD (230,718) J.P. Morgan 0.00% February 20, 2018 USD 168,188 SGD (221,466) Morgan Stanley (1) 0.00% February 22, 2018 USD 93,880 CNH (601,976) J.P. Morgan (2) 0.00% (50) 0.00% * As Forward Foreign Currency Contracts are net settled and rights of offset exist with the counterparties, they are presented on a net basis. **Investments which are less than USD 500 have been rounded down to zero. The accompanying notes form an integral part of the financial statements. Unaudited Semi-Annual Report 5

8 Portfolio of Investments (continued) as at January 31, 2018 Fair Value USD 000 % Net Asset Value Total financial assets at fair value through profit or loss 1,719, % Total financial liabilities at fair value through profit or loss (50) 0.00% Other net assets 22, % Net assets attributable to holders of Redeemable Shares 1,741, % The accompanying notes form an integral part of the financial statements. 6 Unaudited Semi-Annual Report

9 Statement of Comprehensive Income for the six month period ended January 31, 2018 Income Notes 6 month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Net realised and movement in unrealised (losses)/gains on financial assets at fair value through profit or loss 3 (7,326) 41,786 Investment income 39,696 32,327 Total Net income 32,370 74,113 Operating expenses 4 (7,691) (6,234) Operating profit 24,679 67,879 Finance costs Distributions to holders of Redeemable Shares 5 (12,649) (12,591) Net gains after Distributions and before tax 12,030 55,288 Withholding taxes (74) (37) Increase in net assets attributable to holders of Redeemable Shares from operations 11,956 55,251 The net income arose solely from continuing operations. There were no other recognised gains or losses for the period other than as set out in the above Statement of Comprehensive Income. The accompanying notes form an integral part of the financial statements. Unaudited Semi-Annual Report 7

10 Statement of Financial Position as at January 31, 2018 Notes As at January 31, 2018 USD 000 As at July 31, 2017 USD 000 Assets Financial assets at fair value through profit or loss 2 1,719,372 2,091,735 Amounts receivable from subscription of shares 20,575 3,471 Cash and cash equivalents Investment income receivable 6,834 6,566 Other receivable 5 Total Assets 1,746,881 2,101,870 Current Liabilities Financial liabilities at fair value through profit or loss Administration fees AIFM fees Amounts payable for redemption of shares 3,787 4,562 Depositary fees Distribution and shareholder maintenance fees Legal fees Other liabilities Total Current Liabilities (excluding net assets attributable to holders of Redeemable Shares) 5,358 6,350 Net assets attributable to holders of Redeemable Shares 1,741,523 2,095,520 Number of Redeemable Shares 6 Class A (acc) 44,921,776 55,421,700 Class A (dis) 47,037,849 53,765,683 Class B* 719,036 1,004,368 Class N (acc) 14,961,236 18,008,003 Class N (dis) 4,534,964 5,374,457 Class C (acc)** 1,579, ,469 Class C (dis)*** 17,059,964 20,164,006 Class AX 7,292,647 8,326,726 Class Z (acc) 8,287,776 12,683,026 Class Z (dis) 1,934,925 2,478,857 Class A (dis) SGD-H1 1,090,412 1,391,703 Class A (dis) EUR-H1 3,263,788 4,005,632 Class A (dis) RMB-H1 26,436 32,680 The accompanying notes form an integral part of the financial statements. 8 Unaudited Semi-Annual Report

11 Statement of Financial Position (continued) as at January 31, 2018 Notes As at January 31, 2018 USD 000 As at July 31, 2017 USD 000 Net Asset Value per Redeemable Shares Class A (acc) USD USD Class A (dis) USD 8.65 USD 8.67 Class B* USD 8.64 USD 8.66 Class N (acc) USD USD Class N (dis) USD 8.79 USD 8.82 Class C (acc)** USD USD Class C (dis)*** USD 8.64 USD 8.67 Class AX USD 8.63 USD 8.66 Class Z (acc) USD USD Class Z (dis) USD 9.85 USD 9.87 Class A (dis) SGD-H1 SGD 9.88 SGD 9.94 Class A (dis) EUR-H1 EUR 9.48 EUR 9.62 Class A (dis) RMB-H1 RMB RMB * The Company discontinued the sale of Class B shares with effect from April 1, ** Class C (acc) shares launched on June 13, ***Existing Class C shares were renamed Class C (dis) shares with effect from June 13, The accompanying notes form an integral part of the financial statements. Unaudited Semi-Annual Report 9

12 Statement of Changes in Net Assets Attributable to Holders of Redeemable Shares for the six month period ended January 31, month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Net assets attributable to holders of Redeemable Shares at start of the period 2,095,520 1,363,639 Share transactions Issue of Redeemable Shares 280, ,279 Redemption of Redeemable Shares (651,685) (329,330) Reinvestments 4,946 5,081 Income equalisation (157) 269 Net (decrease)/increase from share transactions (365,953) 341,299 Changes in net assets attributable to holders of Redeemable Shares from operations 11,956 55,251 Net assets attributable to holders of Redeemable Shares at end of the period 1,741,523 1,760,189 The accompanying notes form an integral part of the financial statements. 10 Unaudited Semi-Annual Report

13 Statement of Cash Flows for the six month period ended January 31, 2018 Cash flows from operating activities 6 month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Purchases of financial assets at fair value through profit or loss (109,351) (412,976) Unrealised gains on forwards currency contracts Proceeds from sale of investments 473,805 75,039 Net investment income received 39,428 32,815 Operating expenses paid (8,018) (6,028) Net cash provided by/(used in) operating activities 396,478 (311,106) Cash flows from financing activities Issue of Redeemable Shares 268, ,866 Redemption of Redeemable Shares (652,460) (335,155) Distributions paid to holders of Redeemable Shares (12,649) (12,591) Net cash (used in)/provided by financing activities (396,481) 311,120 Net (decrease)/increase in cash and cash equivalents (3) 14 Cash and cash equivalents at start of the period Cash and cash equivalents at end of the period The accompanying notes form an integral part of the financial statements. Unaudited Semi-Annual Report 11

14 Notes to the Financial Statements for the six month period ended January 31, 2018 Introduction Franklin Floating Rate Fund plc (the Company ) is an investment company with variable capital incorporated in the Republic of Ireland as a Public Limited Company on December 1, 1999, under the Irish Companies Act Its Redeemable Shares ( RS ) are denominated in US Dollars, other than the Class A (dis) SGD-H1 Shares, the Class A (dis) EUR-H1 Shares and the Class A (dis) RMB-H1 Shares. The Company is governed by the provisions of the European Union (Alternative Investment Fund Managers Directive) ( AIFMD ) Regulations The A (acc), A (dis), B*, N (acc), N (dis), C (dis)**, AX, Z (acc), Z (dis), A (dis) SGD- H1, A (dis) EUR-H1 and A (dis) RMB-H1 share classes are listed on the Irish Stock Exchange. *The Company discontinued the sale of Class B shares with effect from April 1, ** Existing Class C shares were renamed Class C (dis) shares with effect from June 13, The Company s investment objective is to provide a high level of current income and preservation of capital by investing up to 100% of its net assets in shares of the Franklin Floating Rate Master Series (the Common Shares ) in the Franklin Floating Rate Master Trust (the Master Trust ) (see note 14). 1. Accounting policies The principal accounting policies and estimation techniques applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. (a) Basis of preparation The financial statements are prepared in accordance with AIF Rulebook, Irish Stock Exchange Regulations and International Financial Reporting Standards ( IFRS ) as adopted by the European Union and International Accounting Standard 34 (IAS 34), Interim Financial Reporting. The financial statements should be read in conjunction with the annual financial statements for the year ended July 31, 2017, which have been prepared in accordance with IFRS. The accounting policies applied are consistent with those of the annual financial statements for the year ended July 31, 2017, as described in those annual financial statements. (b) Estimates and judgements The preparation of financial statements in conformity with IFRS, require management to make estimates and assumptions that affect the amounts in the financial statements and accompanying notes. Management believe that the estimates utilised in preparing its financial statements are reasonable and prudent; however, actual results could differ from these estimates. (c) Events during the period There have been no unusual events during the period that have impacted the Company s performance. 12 Unaudited Semi-Annual Report

15 Notes to the Financial Statements (continued) 2. Financial assets and liabilities at fair value through profit or loss As at January 31, 2018 and July 31, 2017, the financial assets and liabilities at fair value through profit or loss comprised the following: As at January 31, 2018 USD 000 As at July 31, 2017 USD 000 Financial assets at fair value through profit or loss Investment in Master Trust 1,718,708 2,090,626 Forward foreign currency contracts 664 1,109 Total financial assets at fair value through profit or loss 1,719,372 2,091,735 As at January 31, 2018 USD 000 As at July 31, 2017 USD 000 Financial liabilities at fair value through profit or loss Forward foreign currency contracts (50) (19) Total financial liabilities at fair value through profit or loss (50) (19) 3. Net realised and movement in unrealised (losses)/gains on financial assets at fair value through profit or loss An analysis of gains and losses on financial assets at fair value through profit or loss for the period ended January 31, 2018 and January 31, 2017 is as follows: 6 month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Realised gains and losses Investments in Master Trust (9,276) (3,006) Forward foreign currency contracts 2,795 (31) Other foreign exchange (506) 25 Total realised losses (6,987) (3,012) 6 month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Movement in unrealised gains and losses Investments in Master Trust ,764 Forward foreign currency contracts (478) 34 Total movement in unrealised (losses)/gains (339) 44,798 6 month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Total realised losses (6,987) (3,012) Total movement in unrealised (losses)/gains (339) 44,798 Net realised and movement in unrealised (losses)/gains on financial assets at fair value through profit or loss (7,326) 41,786 Unaudited Semi-Annual Report 13

16 Notes to the Financial Statements (continued) 4. Operating expenses 6 month period ended January 31, 2018 USD month period ended January 31, 2017 USD 000 Administration fees (note 12) AIFM fees (note 12) 2,436 1,974 Audit fees Depositary fees (note 12) Directors fees (note 12) Distribution fees (note 12) 2,514 2,154 Legal fees Miscellaneous fees Printing & publication fees 23 2 Recharge fees 35 Reimbursement fees (5) Shareholder maintenance fees (note 12) 1,795 1,380 VAT (1) (17) 7,691 6,234 Audit fees solely relate to statutory audit fees. There were no other fees paid to PricewaterhouseCoopers in Ireland as the statutory auditor of the Company, as no other services were provided. 5. Distributions to holders of Redeemable Shares The following distributions in USD were made by the Company for the period ended January 31, Ex- dividend date Payment date A (dis) USD per share B USD per share N (dis) USD per share C (dis)* USD per share AX USD per share Z (dis) USD per share A (dis) SGD-H1 SGD per share A (dis) EUR-H1 EUR per share A (dis) RMB-H1 RMB per share Aug 01, 2017 Aug 08, Sep 01, 2017 Sep 08, Oct 02, 2017 Oct 09, Nov 01, 2017 Nov 08, Dec 01, 2017 Dec 08, Jan 02, 2018 Jan 8, Unaudited Semi-Annual Report

17 Notes to the Financial Statements (continued) 5. Distributions to holders of Redeemable Shares (continued) The following distributions in USD were made by the Company for the period ended January 31, Ex- dividend date Payment date A (dis) USD per share B USD per share N (dis) USD per share C* USD per share AX USD per share Z (dis) USD per share A (dis) SGD-H1 SGD per share A (dis) EUR-H1 EUR per share A (dis) RMB-H1 RMB per share Aug 01, 2016 Aug 08, Sep 01, 2016 Sep 09, Oct 03, 2016 Oct 10, Nov 01, 2016 Nov 08, Dec 01, 2016 Dec 08, Jan 03, 2017 Jan 10, *Existing Class C shares were renamed to Class C (dis) shares with effect from June 13, Redeemable Shares and Share Capital Authorised share capital The minimum authorised share capital of the Company is 2 (two) shares of no par value designated as unclassified shares. The maximum authorised share capital of the Company is 500,000,000,002 (five hundred billion and two) shares of no par value designated as unclassified shares. Subscriber shares Subscriber shares issued amount to USD 2, being 2 subscriber shares of USD 1, fully paid. The subscriber shares do not form part of the NAV of the Company and are thus disclosed in the financial statements by way of this note only. In the opinion of the Directors, this disclosure reflects the nature of the Company s business as an Investment Company. Redeemable Shares ( RS ) The issued share capital is at all times equal to the NAV of the Company. Shareholders may redeem any or all of their Shares on any Dealing Day except when dealings have been temporarily suspended. Redemption request forms must be received by the Company at the address specified in the redemption request form not later than the Valuation Point on the Repurchase Request Deadline. If the Company, as an investor in the Master Trust, is asked to vote on a proposed change in a fundamental policy of the Master Trust or any other matter pertaining to the Master Trust (other than continuation of the business of the Master Trust after withdrawal of another investor in the Master Trust), the Company will solicit proxies from its shareholders and vote its interest in the Master Trust for and against such matters proportionately to the instructions to vote for and against such matters received from the Company s shareholders. For the Master Trust, redemptions are processed on any day the Master Trust is open for business and are effected at the Net Asset Value per share next calculated after the Master Trust receives a redemption request in proper form. Redemption payments will be made within seven days after receipt of the redemption request in proper form. Proceeds for redemption orders cannot be wired on those business days when the Federal Reserve Bank System and the custodian bank are closed. In unusual circumstances, the Master Trust may temporarily suspend redemptions or postpone the payment of proceeds as allowed by federal securities law. Unaudited Semi-Annual Report 15

18 Notes to the Financial Statements (continued) 6. Redeemable Shares and Share Capital (continued) Redeemable Shares ( RS ) (continued) The movement in RS during the period/year is shown below: 6 month period ended Year ended January 31, 2018 July 31, 2017 A (acc) shares opening balance at start of period/year 55,421,700 33,860,525 A (acc) shares subscriptions in the period/year 9,795,021 36,305,527 A (acc) shares redemptions in the period/year (20,294,945) (14,744,352) Total A (acc) shares in issue at end of period/year 44,921,776 55,421,700 A (dis) shares opening balance at start of period/year 53,765,683 43,912,362 A (dis) shares subscriptions in the period/year 5,359,811 33,266,395 Reinvestments of shares in the period/year 245, ,323 A (dis) shares redemptions in the period/year (12,332,825) (23,944,397) Total A (dis) shares in issue at end of period/year 47,037,849 53,765,683 B shares opening balance at start of period/year 1,004,368 1,677,864 B shares subscriptions in the period/year 749 1,373 Reinvestments of shares in the period/year 5,703 16,984 B shares redemptions in the period/year (291,784) (691,853) Total B* shares in issue at end of period/year 719,036 1,004,368 N (acc) shares opening balance at start of period/year 18,008,003 12,333,350 N (acc) shares subscriptions in the period/year 1,294,939 10,832,720 N (acc) shares redemptions in the period/year (4,341,706) (5,158,067) Total N (acc) shares in issue at end of period/year 14,961,236 18,008,003 N (dis) shares opening balance at start of period/year 5,374,457 4,780,458 N (dis) shares subscriptions in the period/year 303,084 3,045,061 Reinvestments of shares in the period/year 19,139 35,608 N (dis) shares redemptions in the period/year (1,161,716) (2,486,670) Total N (dis) shares in issue at end of period/year 4,534,964 5,374,457 C (acc) shares opening balance at start of period/year 602,469 C (acc) shares subscriptions in the period/year 1,104, ,172 C (acc) shares redemptions in the period/year (127,113) (13,703) Total C (acc)** shares in issue at end of period/year 1,579, , Unaudited Semi-Annual Report

19 Notes to the Financial Statements (continued) 6. Redeemable Shares and Share Capital (continued) Redeemable Shares ( RS ) (continued) 6 month period ended Year ended January 31, 2018 July 31, 2017 C (dis) shares opening balance at start of period/year 20,164,006 16,462,704 C (dis) shares subscriptions in the period/year 1,339,947 9,401,685 Reinvestments of shares in the period/year 130, ,171 C (dis) shares redemptions in the period/year (4,573,995) (5,958,554) Total C (dis)*** shares in issue at end of period/year 17,059,964 20,164,006 AX shares opening balance at start of period/year 8,326,726 8,089,372 AX shares subscriptions in the period/year 129,508 1,786,628 Reinvestments of shares in the period/year 86, ,834 AX shares redemptions in the period/year (1,250,152) (1,721,108) Total AX shares in issue at end of period/year 7,292,647 8,326,726 Z (acc) shares opening balance at start of period/year 12,683,026 6,750,103 Z (acc) shares subscriptions in the period/year 1,509,255 10,909,777 Z (acc) shares redemptions in the period/year (5,904,505) (4,976,854) Total Z (acc) shares in issue at end of period/year 8,287,776 12,683,026 Z (dis) shares opening balance at start of period/year 2,478, ,831 Z (dis) shares subscriptions in the period/year 581,946 7,579,962 Reinvestments of shares in the period/year 15,142 21,558 Z (dis) shares redemptions in the period/year (1,141,020) (6,032,494) Total Z (dis) shares in issue at end of period/year 1,934,925 2,478,857 A (dis) SGD-H1 shares opening balance at start of period/year 1,391,703 35,839 A (dis) SGD-H1 shares subscriptions in the period/year 367,312 2,329,641 Reinvestments of shares in the period/year 14 3 A (dis) SGD-H1 shares redemptions in the period/year (668,617) (973,780) Total A (dis) SGD-H1 shares in issue at end of period/year 1,090,412 1,391,703 A (dis) EUR-H1 shares opening balance at start of period/year 4,005,632 23,553 A (dis) EUR-H1 shares subscriptions in the period/year 1,414,005 4,774,508 Reinvestments of shares in the period/year 54,686 28,635 A (dis) EUR-H1 shares redemptions in the period/year (2,210,535) (821,064) Total A (dis) EUR-H1 shares in issue at end of period/year 3,263,788 4,005,632 Unaudited Semi-Annual Report 17

20 Notes to the Financial Statements (continued) 6. Redeemable Shares and Share Capital (continued) Redeemable Shares ( RS ) (continued) 6 month period ended Year ended January 31, 2018 July 31, 2017 A (dis) RMB-H1 shares opening balance at start of period/year 32,680 32,680 A (dis) RMB-H1 shares redemptions in the period/year (6,244) Total A (dis) RMB-H1 shares in issue at end of period/year 26,436 32,680 * The Company discontinued the sale of Class B shares with effect from April 1, ** Class C (acc) shares launched on June 13, ***Existing Class C shares were renamed Class C (dis) shares with effect from June 13, Taxation Under current Irish law and practice, the Company qualifies as an investment undertaking as defined in Section 739B of the Taxes Consolidation Act, 1997, as amended. On that basis, it is not chargeable to Irish tax on its income or gains. However, Irish tax may arise on the occurrence of a chargeable event. A chargeable event includes any distribution payments to shareholders, any encashment, redemption, cancellation or transfer of shares and the holding of shares at the end of each eight year period beginning with the acquisition of such shares. No Irish tax will arise on the Company in respect of chargeable events in respect of: a shareholder who is neither Irish resident nor ordinarily resident in Ireland for tax purposes, at the time of the chargeable event, provided appropriate valid declarations in accordance with the provisions of the Taxes Consolidation Act, 1997, as amended are held by the Company or where the Company has been authorised by the Irish Revenue to make gross payments in the absence of appropriate declarations; and certain exempted Irish tax resident shareholders who have provided the Company with the necessary signed statutory declarations. The Finance Act 2010 provides that the Revenue Commissioners may grant approval for investment funds marketed outside of Ireland to make payments to non-resident investors without deduction of Irish tax where no relevant declaration is in place, subject to meeting the equivalent measures. A fund wishing to receive approval must apply in writing to the Revenue Commissioners, confirming compliance with the relevant conditions. Dividends, interest and capital gains (if any) received on investments made by the Company may be subject to withholding taxes imposed by the country from which the investment income/gains are received and such taxes may not be recoverable by the Company or its shareholders. 8. Exchange rates The following USD exchange rates were used to convert the investments and other assets and liabilities denominated in currencies other than USD: January 31, 2018 July 31, 2017 Chinese Yuan Renminbi Euro Singapore Dollar Unaudited Semi-Annual Report

21 Notes to the Financial Statements (continued) 9. Financial risk management The Company s investment goal is to provide a high level of current income and preservation of capital by investing up to 100% of its net assets in the Master Trust, which is registered in the USA under the US Investment Company Act of 1940, as amended, as an open-end investment company, and consists of one fund, the Franklin Floating Rate Master Series. The shares are exempt from registration under the US Securities Act of The investment objectives, policies and restrictions of the Master Trust are described in the Prospectus of the Company. There can be no assurance that the Company will achieve its investment objective. Investors should carefully assess the risks associated with an investment in the Company and, through this, the risks associated with the Master Trust. The risks of the Master Trust and the policies to manage those risks are described in the Investment Considerations, Investment Techniques and Risk Factors sections of the Prospectus of the Company. Concentration and liquidity risk Through its investment in the Master Trust, the Company bears a high degree of concentration risk though this is mitigated through the diversification of the investments held by the Master Trust. In certain circumstances the Directors can limit redemptions as follows: 10% of the outstanding Shares in issue on any one dealing date. The Trustees of the Master Trust have no powers to limit or restrict redemptions. The financial liabilities of the Company, including net assets attributable to redeemable participating shareholders, all have a contractual maturity date of within one month. The Company is 100% owned by Templeton Global Advisors Limited, which is made up of a number of nominee accounts. At January 31, 2018 and July 31, 2017 the Company invested 98.69% and 99.77% respectively of its net assets in shares of the Franklin Floating Rate Master Series (the Common Shares ) in the Master Trust. A fractional portion is invested in forward foreign currency contracts as a hedging measure. The notional amount of those contracts is displayed on page 5 of this report. The cost of hedging does not impact portfolio value per se and is allocated to respective hedge classes. Market price risk All investments present a risk of loss of capital. The Company s market price risk arises through its investment in the Master Trust. The Master Trust moderates this risk through a careful selection of securities and investments within specified limits. The maximum risk of the Company s investments is determined by the fair value of the investments as presented in the Statement of Financial Position. Market price risk represents the potential loss the Company might suffer through price movements in the Net Asset Value ( NAV ) of the Master Trust. If the price of the Master Trust had increased or decreased by 5% with all other variables held constant, this would have increased/decreased the net assets attributable to holders of RS by USD 85,935,391 (July 31, 2017: USD 104,531,317). The market price risk information is a relative estimate of risk rather than a precise and accurate number as the models are based on historical data and cannot take account of the fact that future market price movements, correlations between markets and levels of market liquidity in conditions of market stress may bear no relation to historical patterns. Unaudited Semi-Annual Report 19

22 Notes to the Financial Statements (continued) 9. Financial risk management (continued) Interest rate risk The Company holds cash balances which are subject to a floating rate of interest. These cash balances are placed with reputable financial institutions. The majority of the Company s assets are shares in the Master Trust which neither pay interest nor have a maturity date. At January 31, 2018 and July 31, 2017, any reasonably possible movement in interest rates would have an immaterial direct effect on the net assets attributable to holders of RS. However, any movement in interest rates may have an effect on the NAV of the Master Trust as well as the dividend income received by the Company from the Master Trust. Interest rate risk sensitivity is monitored by the Investment Adviser through its incorporation in the VaR model. Credit risk The Company will be exposed to a credit risk on parties with whom it trades and will also bear the risk of settlement default. The Company s investment in the Master Trust is held by the Depositary in such a manner as to be separately identifiable from the Depositary s own investments, and will therefore be unavailable to the creditors of the Depositary. The Company has an ongoing contract with its Depositary for the provision of custody services. Details of securities held in custody on behalf of the Company are received and reconciled monthly. To the extent that J.P. Morgan Bank (Ireland) Plc ( J.P. Morgan ) carries out the above duties on the Company s behalf, the Company is exposed to counterparty risk. The current ratings of J.P. Morgan Chase Bank, N.A. are: S&P A+; Moody s Aa3; and Fitch AA-. Franklin Resources, Inc., which is the ultimate parent of both Franklin Advisers, Inc. ( Advisers ) as Investment manager, and Franklin Templeton International Services S.à r.l. as Alternative Investment Fund Manager (the AIFM ), has a Counterparty Credit Committee which meets regularly to review and update a list of approved counterparties, change exposure limits and counterparty approval status. The committee has the authority to block trading with a particular counterparty. Total firm wide exposures to each counterparty along with each counterparties credit rating and credit default swap spread are also monitored, and included in weekly reporting to the Trading and Portfolio Management teams, as contributory factors in determining the creditworthiness of counterparties. With the exception of cash, the Company s assets held by J.P. Morgan or its sub-custodians are segregated in such a manner that they are not subject to creditor claims against J.P. Morgan. Securities received by J.P. Morgan in its capacity as Depositary (whether the securities are registered or bearer) do not form a part of J.P. Morgan s general assets. Assets are held on J.P. Morgan s system in accounts segregated from general assets of the firm. To the fullest extent permissible by law and local legislation, J.P. Morgan s sub-custodians hold assets in segregated accounts designated as holding assets belonging to clients of J.P.Morgan. Assets belonging to J.P. Morgan or to its sub-custodians cannot be deposited into these accounts. Cash held by J.P. Morgan is not segregated. The Master Trust invests in corporate loans. The Agent Banks are the lenders that administer the corporate loans and are responsible for collecting principal, interest and fee payments from the corporate borrowers. The corporate loans are not held by the Custodian of the Master Trust at the period end. The Investment Manager of the Master Trust performs a quarterly reconciliation to the Agent Banks books and records. 20 Unaudited Semi-Annual Report

23 Notes to the Financial Statements (continued) 9. Financial risk management (continued) Foreign currency risk SGD, EUR and RMB shares classes are designated in a currency other than the base currency of the Company, being US Dollars. In such circumstances, adverse exchange rate fluctuations between the base currency and the Class Currency may result in a decrease in return and/or a loss of capital for shareholders. The Investment Manager may try to mitigate this risk for holders of the Hedged Class Shares by using any of the efficient portfolio management techniques and instruments (including currency options and forward foreign currency contracts), within the conditions and limits imposed by the Central Bank, to hedge the foreign currency exposure of such classes into the base currency of the Company. A class may not be leveraged as a result of the use of such techniques and instruments however, subject to the below, hedging up to, but not exceeding 105% of the NAV attributable to the relevant class, is permitted. The Investment Manager will monitor hedging on at least a monthly basis and will increase or reduce the level of hedging to ensure that it neither exceeds nor remains below 100% of the NAV attributable to the relevant class at any month-end. The Company invests in a number of non USD forward foreign currency contracts which amounted to USD 45,307,604 (July 31, 2017: USD 54,318,452). Non USD cash held at the Statement of Financial Position date amounted to USD 72,626 (July 31, 2017: USD 68,034). Foreign currency risk sensitivity from portfolio cash balances or portfolio positions is monitored by the Investment Adviser through its incorporation in the VaR model. Capital risk management The capital of the Company is represented by the net assets attributable to holders of RS. The amount of net assets attributable to holders of RS can change significantly on a daily basis as the Company is subject to daily subscriptions and redemptions at the discretion of shareholders. The Company s objective when managing capital is to safeguard the Company s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a strong capital base to support the development of the investment activities of the Company. In order to maintain or adjust the capital structure, the Company s policy is to redeem and issue new shares in accordance with the constitutional documents of the Company, which include the ability to restrict redemptions and require certain minimum holdings and subscriptions. The Board of Directors and the AIFM monitor capital on the basis of the value of net assets attributable to RS. 10. Fair value estimation The Company is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1: Inputs that are quoted market prices (unadjusted) in active markets for identical instruments; Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and Unaudited Semi-Annual Report 21

24 Notes to the Financial Statements (continued) 10. Fair value estimation (continued) Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments but for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. These may include investment-grade corporate bonds and certain non-us sovereign obligations, listed equities, over-the-counter derivatives and investment funds. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. The Company holds 100% of the shares in issue of the Master Trust, this investment has therefore been classified as Level 2. There were no significant transfers between levels during the period. The following table presents the investment in the Master Trust carried on the Statement of Financial Position by level within the valuation hierarchy as of January 31, 2018: January 31, 2018 Assets Level 1 USD 000 Level 2 USD 000 Level 3 USD 000 Total USD 000 Financial assets at fair value 1,718,708 1,718,708 Forward foreign currency contracts Total Assets 1,719,372 1,719,372 Liabilities Forward foreign currency contracts (50) (50) Total Liabilities (50) (50) The following table presents the investment in the Master Trust carried on the Statement of Financial Position by level within the valuation hierarchy as of July 31, 2017: July 31, 2017 Assets Level 1 USD 000 Level 2 USD 000 Level 3 USD 000 Total USD 000 Financial assets at fair value 2,090,626 2,090,626 Forward foreign currency contracts 1,109 1,109 Total Assets 2,091,735 2,091,735 Liabilities Forward foreign currency contracts (19) (19) Total Liabilities (19) (19) 22 Unaudited Semi-Annual Report

25 Notes to the Financial Statements (continued) 10. Fair value estimation (continued) Assets and liabilities not carried at fair value but for which fair value is disclosed The following table analyses, within the fair value hierarchy, the Company s assets and liabilities not carried at fair value at January 31, 2018 but for which fair value is disclosed. January 31, 2018 Assets Level 1 USD 000 Level 2 USD 000 Level 3 USD 000 Total USD 000 Amounts receivable from subscription of shares 20,575 20,575 Cash and cash equivalents Investment income receivable 6,834 6,834 Other receivable 5 5 Total 95 27,414 27,509 January 31, 2018 Liabilities Level 1 USD 000 Level 2 USD 000 Level 3 USD 000 Total USD 000 Administration fees AIFM fees Amounts payable for redemption of shares 3,787 3,787 Depositary fees Distribution and shareholder maintenance fees Legal fees Other liabilities Net assets attributable to holders of Redeemable Shares 1,741,523 1,741,523 Total 1,746,831 1,746,831 The following table analyses, within the fair value hierarchy, the Company s assets and liabilities not carried at fair value at July 31, 2017 but for which fair value is disclosed. July 31, 2017 Assets Level 1 USD 000 Level 2 USD 000 Level 3 USD 000 Total USD 000 Amounts receivable from subscription of shares 3,471 3,471 Cash and cash equivalents Investment income receivable 6,566 6,566 Total 98 10,037 10,135 Unaudited Semi-Annual Report 23